Treatment of Certain items

25/12/2020 1 By indiafreenotes
  1. Interest and Dividend:

Cash flows from interest and dividends received and paid should be disclosed separately and classified on the basis of nature of the enterprise as shown below:

For Financial enterprises:

(i) Interest paid and received; dividend received as operating activities.

(ii) Dividend paid as financing activities.

For Other enterprises:

(i) Interest and dividend received as investing activities.

(ii) Interest and dividend paid as financing activities.

  1. Extra Ordinary Items:

The cash flows associated with extraordinary items should be classified as arising from operating, investing or financing activities as appropriate. It should be disclosed separately.

Few examples of such items are:

(i) Claim for loss of Stock: Operating activity

(ii) Claims for loss of assets: Investing activity

(iii) Recovery of bad debts: Operating activity

(iv) Damages paid/received for breach of contract: Operating activity

(v) Winnings from lotteries: Investing activity

(vi) Cost of legal action to protect property title: Investing activity.

  1. Taxes on Income:

Cash flows arising from taxes on income should be separately disclosed and should be classified as cash-flows from operating activities under they can be specifically identified with financing and investing activists.

For instance:

(i) Provision for Taxation for the current year: Non-cash charge under operating activity

(ii) Tax paid: Operating cash out flow

(iii) Income tax refund: Cash inflow from operating activity

(iv) Capital gains tax: Cash out flow from investing activity

(v) Corporate dividend tax: Cash out flow from financing activity.

  1. Foreign Currency Cash Flows:

Foreign currency cash flows should be converted at the exchange rate of the date of cash flow. Exchange gain/loss on cash and cash equivalents held in foreign currency will be reported as part of reconciliation of change in cash and cash equivalents for the period and hence, not reported in cash flow statement.

  1. Non-Cash Transactions:

Investing and financing transactions that do not require the use of cash or cash equivalents are not shown in the cash flow statement.

Examples of such non-cash transactions are:

(i) Issue of shares or debentures for a consideration other than cash i.e. against building, machinery etc.

(ii) Conversion of debentures into equity shares.

(iii) Purchase of business by issue of shares.

AS-3 (Revised) recommends that such transactions may be disclosed under footnote to cash flow statement.

  1. Investments in Subsidiaries, Associates and Joint Venture:

Acquisition of interest in any subsidiary, associates or in any joint venture is treated as “Investing Activity”. Similarly, sale or disposal of such interest and receipt of interest or dividends on such investments is treated as “Investing Activity”.

The following points will highlight the treatment of seven items in the cash flow statement.

  1. Extraordinary Items:

Any cash flow relating to extraordinary items should be as far as possible, be classified into operating, investing or financing activities and those items should be separately disclosed in the cash flow statement.

Some of the examples for extraordinary items are bad debts recovered, claims from insurance companies, winning of a law suit or lottery etc.

  1. Interest Received:

(a) It should be considered as cash inflow under investment activities when it is received from long-term investment.

(b) It should be treated as cash inflow under operating activities when it is received from short-term investment classified as cash equivalents.

  1. Interest Paid:

(a) Interest paid on debentures and other long-term loans should be classified as cash outflow from financing activities.

(b) Interest paid on working capital loan e.g., bank overdraft, should be classified as cash outflow under operating activities.

  1. Dividend Received:

(a) Dividend received by a financial enterprise should be in operating activities.

(b) For companies other than financial enterprises, dividend received should be classified as cash flows from investment activities.

  1. Dividend Paid:

Dividends paid should be always considered as cash outflows from financing activities regardless of the nature of the enterprise.

  1. Taxes on Income:

Cash outflows arising from taxes on income should be separately disclosed and should be classified as cash outflows from operating activities unless they can be specifically identified with financing and investing activities.

  1. Non-cash Transactions:

Investing and financing transactions not involving the use of cash or cash equivalents i.e., the acquisition of an enterprise by means of issue of shares or conversion of debt to equity etc., should be excluded from cash flow statement.